Ivey Business Journalhttp://iveybusinessjournal.com
Improving the Practice of ManagementTue, 03 Mar 2015 21:44:02 +0000en-UShourly1http://wordpress.org/?v=4.1.1Dealing with the New Cubahttp://iveybusinessjournal.com/dealing-with-the-new-cuba/
http://iveybusinessjournal.com/dealing-with-the-new-cuba/#commentsWed, 25 Feb 2015 18:36:46 +0000http://iveybusinessjournal.com/?p=17453Every December, many faithful Cubans travel from across the country to El Rincón, about 25 kilometres south of Havana, where they visit the Sanctuary of Saint Lazarus, a revered Christian saint reportedly brought back from the dead (as well as the Afro-Cuban Yoruba healer god Babalú Aye). During the most recent pilgrimage, citizens of all religious stripes had a man-made miracle to celebrate. On Dec. 17, 2014, the Cuban economy was in some ways raised from the dead by Cuban President Raúl Castro and U.S. President Barack Obama. The two leaders jointly announced a historic agreement to begin normalizing relations between their nations. Putting an end to decades of unproductive hostility, the Obama administration will move to fully restore diplomatic ties with Cuba and ease travel and commerce restrictions. The White House has also pledged to push the U.S. Congress to end the American trade embargo that has attempted to cripple the island nation’s economy for decades and nearly managed to do so in the 1990s before Venezuela emerged as Cuba’s new lifeline.

The embargo is actually a complex set of economic sanctions that must pass through different political processes in order to be amended. President Obama has taken action to review, amend and lift as many as he can under his own authority. However, the Helms–Burton Act of 1996 codified the main provisions of the embargo into law and thus took the right to lift them away from the president. Since only a vote by Congress can revoke the Act, lifting all sanctions against Cuba will prove difficult. The most likely scenario in the short to medium term would see parts of the embargo being removed a bit at a time, creating a “Swiss cheese” policy with gaping holes. The largest holes would be created by the end of the travel ban on U.S. tourists and by the removal of Cuba from the list of states that sponsor terrorism. The former, in particular, would be bound to generate powerful incentives for the easing of other embargo restrictions as U.S. hotel chains, travel firms and catering companies would want to enter the Cuban market to reap economic benefits from the inflow of American tourists, and U.S. engineering and construction firms would want to participate in the needed upgrade of Cuba’s tourism facilities and related infrastructure. The latter would facilitate all manner of international financial transactions, as banks and other institutions in the United States and elsewhere would no longer face fines for doing business with Cuba.

Following the December 17 announcement, Canadian companies already on the island and those considering entering this market immediately started to ponder the potential opportunities and risks that normalized relations between Cuba and the United States represent. Royal Bank of Canada chief executive David McKay, for example, told The Globe and Mail that the deal, which was brokered by Pope Francis, had Canada’s second-largest lender by assets thinking about returning to Cuba, which RBC abandoned in the 1960s after doing business in the Caribbean nation since 1899. “We see a very attractive, long-term marketplace in Cuba,” McKay said, noting the bank’s management team had been anticipating a shift in Cuba’s potential as a foreign market “for quite some time.”

Speculation that a move toward normalization of relations between Cuba and the United States might be imminent has been a recurring theme for decades. In 2006, speculation was spurred once again by the announcement that Fidel Castro had fallen gravely ill and would be replaced by his brother Raúl. Naturally, there was a wave of interest in the potential opportunities and threats that would be presented by a post-embargo Cuba. We wrote several articles on the subject. In “Oh, Canada, Will Cuba Stand on Guard for Thee? Preparing for the End of the U.S. Embargo on Cuba,” which appeared in this publication in 2009, we described the nature of the trade and investment restrictions and how their gradual dismantling could affect Canadian business interests already on the island and possibly those on their way there. We also offered a series of recommendations meant to assist competitive assessments.

While the actual move toward normalization has taken eight years longer than expected, President Raúl Castro has been busy reforming Cuba’s moribund economy more along market lines. This paper examines whether or not the current anticipation of new business opportunities is warranted while taking a fresh look at the investment and trade potential and risks that a more market-friendly, post-embargo Cuba presents to foreign investors and traders.

CANADA’S RELATIONSHIP WITH CUBA

Canada–Cuba business relations have ebbed and flowed as much as Canadian rivers during spring thaw. The business rapprochement between the two nations began in the early 1990s after the collapse of the Soviet bloc, an era that the Cubans euphemistically call “the special period in time of peace.” With the loss of its Soviet benefactor and a looming economic crisis, the Cuban government needed to urgently find alternative finances, technology and markets, so Havana moved to actively seek formerly shunned foreign investment and commercial trade partners. Cuba updated its trade and investment regulations (Law 77 of 1995), opened new financial facilities, and sent managers abroad to learn management techniques. At the same time, the Caribbean island won the hearts and minds of an ever-increasing number of international tourists. As a result, the mid-1990s were relatively heady days for Canada–Cuba business relations, as Canadian traders and investors happily filled the gap left by the disappearance of COMECON, the Soviet-led economic association of communist countries established in 1949 to facilitate trade and development. However, American sanctions such as the Helms–Burton Law of 1996 and the post-9/11 Patriot Act somewhat restrained the enthusiasm of Cuba’s Canadian business partners. And a big chill in Canada–Cuba commerce emerged in the late 1990s, when medium- and smaller- sized joint ventures experienced a policy-led culling that betrayed Cuba’s preference for Soviet-style state-led industrial gigantism. Many traders experienced a culling of their own as the balance of unpaid commercial accounts exploded and Canadian government-backed credit windows were maxed out. In October 2000, the United States made matters worse by renewing sales of agricultural products to Cuba, thus eliminating market opportunities for Canadians taking advantage of embargo-created market distortions.

The darkest moments for many foreign business interests in Cuba came in 2011. Doing business in the nation, as indicated by the popular Cuban refrain no es fácil, is not easy. When people call it “interesting,” they often really mean frustrating or infuriating. After all, when compared to other countries, Cuba has a “disabling” rather than “enabling” business environment (e.g. red tape, overbearing top-down bureaucracy, fickle deals, changing priorities, credit shortages, etc.). But Raúl Castro’s 2011 campaign to rein in business corruption created a significant new challenge. Indeed, what is considered acceptable in Cuba changed with the new leadership, but the new rules of the game were not made immediately clear. And as many local and foreign business people have learned the hard way, fairness isn’t always a priority because no one can fight City Hall, at least not when it flies the Cuban flag. Canadian businessman Cy Tokmakjian, the 70-plus-year-old founder of the Tokmakjian Group transportation firm, one of the largest foreign operations in the country, was arrested by Cuban authorities in September 2011 and has been held ever since without charges in Cuba’s La Condesa prison. Sarkis Yacoubian, another Canadian, was sentenced to nine years in jail in a less-than-transparent corruption trial in June 2013 and, a few months later, was abruptly expelled from Cuba with no official explanation from Havana’s government.

Despite all of the above, Canada’s relationship with Cuba remain significant. With over 1.1 million Canadians traveling to the island each year, Canada is Cuba’s largest source of tourists by a wide margin. In 2013, Canada was Cuba’s fifth-largest merchandise trading partner, benefiting from about $900 million in bilateral trade, behind Venezuela, China, Spain and the Netherlands Antilles. Supported by The Canadian Commercial Corporation (CCC), Canadian exports to Cuba currently consist of agricultural products (especially wheat) and industrial equipment for mining, electricity generation, transportation, telecommunications and papermaking. Canadian imports from Cuba are dominated by nickel, but also include rum, cigars, frozen lobsters and coffee.

There are a number of bright lights on the investment side. Canadian firms have substantial investments in Cuba’s mining, electricity, oil, agri-food and tourism sectors. Sherritt International has been a steadfast player in mining, power and oil despite the ups and downs of the international nickel price, and various traders in commodities have done well. The patience, fortitude and steadiness of 360 Vox Corporation (formerly Leisure Canada) in the tourism and real estate sectors will most certainly be handsomely rewarded soon.

CUBA MARKET RISING

Barring some unexpected events (such as the Mariel boatlift and the Elián tug of war) or geopolitical crises (like the shooting of the Miami-based Brothers to the Rescue planes by Cuban jets that resulted in the enactment of the Helms–Burton Law), the end of the U.S. embargo certainly appears nigh. When the day comes that anyone can use an American credit card in Havana, there is really no turning back, especially after the codified travel ban is completely lifted. What remains to be seen is how the Cubans can manage to improve their business environment while achieving their primary objective of preserving the country’s socialist values and its state-centered economy.

One indication that Cuba is serious about allowing an increased market presence in the country is the new Foreign Investment Law (No. 118) enacted in March 2014. Another positive sign is the new special development zone created around a new container hub at the port of Mariel. The Cuban government has put together a portfolio of investment opportunities consisting of 246 projects with an estimated value of US$8.7 billion. Collectively, they are expected to generate as much as US$2.5 billion in annual investment, which Cuba estimates is required to stimulate economic development. The sectors involved include food, biotech/pharmaceuticals, basic industry, transportation infrastructure, waste management, environmental remediation, tourism, mining, oil and gas.

The new foreign investment law and the kinds of projects contained in the portfolio mentioned above are in line with the Economic and Social Policy Guidelines of the Party and the Revolution (a.k.a. Lineamientos), which is the closest thing Cuba has to a development plan. While rooted in a socialist socio-economic model of development, the policy mix in question allows, once again in principle like in Law 77 but perhaps this time in practice, for 100 per cent foreign-owned ventures. And although citizens residing on the island are excluded, investment by Americans and Cuban nationals residing abroad is allowed.

The focus on large investment projects, especially in the special development zone around Mariel, could prove detrimental to small- and medium-sized enterprises (SMEs) and other geographic regions. That said, related clusters, spin-offs and supply/value chain linkages could eventually provide benefits for these smaller enterprises and the less advantaged regions of the country.

Of special interest to Canadians are projects involving exploration and environmental remediation in the extractive industries, transportation infrastructure development, and waste management. Since several projects are in the food growing and processing sector for both internal consumption (especially import substitution) and export, Canadian agricultural inputs (e.g. potassium chloride for fertilizers, machinery and parts) also have good potential.

That said, change never treats everyone the same. And as Cuba begins to overcome its chronic economic woes, there is no question that future business prospects look very bright for some and rather dark for others. In general, it appears as if it is indeed time for Americans and Cubans to sing “happy times are here again.” For everyone else, a significant amount of uncertainty remains. As a result, Canadian traders and investors should review opportunities carefully and determine if they can be competitive in the short run while the U.S. embargo is not fully lifted, and in the long term when Cuba becomes just another “normal” trade and investment destination.

STRATEGIES FOR A NORMALIZED CUBA

We think Cuba is really finally ready to “open for business” via the normalization of relations with the United States, which will unleash a dynamic that will move Cuba toward a more market-driven socialism.

Circumstances, of course, have changed since we first looked at the opportunities presented by a post-embargo Cuba. Among other things, no oil has been discovered in Cuba’s deep waters in the Gulf of Mexico; Venezuela is spiraling into a deep economic crisis through poor economic management and lower oil prices; and the SME sector has been opened. Nevertheless, the basic strategic analysis framework we previously developed for a post-embargo Cuba is still as relevant as it was at the time of writing.

Simply put, existing business partners must be prepared to modify or change their strategies to fit with an open and more competitive Cuban market. They must plan to compete with other international interests, ranging from the Europeans and the Chinese to South American interests and Cuban-Americans, not to mention the hungry U.S. businesses that desire a big bite of the long-forbidden fruit. As we noted in our previous IBJ article, the impact of U.S. businesses, including Cuban-American concerns, on the Cuban business landscape will be enormous. And some Canadian companies will find that they cannot compete effectively with Cuba’s natural U.S. trading partners (or that compensation for the owners of the nationalized assets they have been using becomes too onerous or cumbersome).

In essence, there are two different timeframes to plan for: 1) between now and the lifting of all U.S. restrictions; and 2) once Cuba becomes just another “normal” country to invest in and trade with, albeit a socialist one.

Moving forward, Canadian business enterprises need to be aware that their experience on the island does confer a first-mover advantage. Sherritt International’s stock jumped when the plan to normalize U.S.–Cuba relations was announced. But past business camaraderie will not be enough to prosper in the new Cuba if the basic value proposition is not competitive.

A proxy of competitiveness in a post-embargo Cuba can be developed by benchmarking a company’s value proposition against those of companies that are already successful in a specific sector or commodity in “similar” Caribbean Basin countries. If direct exports to the island don’t make sense, supply-chain strategies involving American consolidators, wholesalers or final good assemblers are also possible.

The “big bang” for Canadian professional service providers such as engineering firms and commercial banks, especially those with a track record on the island, will only occur after Cuba becomes an approved recipient of international financial institution loans and investments.

The bottom line is that Cuba is a quirky country that can be financially and legally treacherous for international business ventures. And even if the long-awaited market opening happens as announced, it will be done “a la Cubana,” which means existing and potential Canadian business partners must have patience and nerves of steel — in addition to capital.

]]>http://iveybusinessjournal.com/dealing-with-the-new-cuba/feed/0How to Restore Public Trust in Bankinghttp://iveybusinessjournal.com/how-to-restore-public-trust-in-banking/
http://iveybusinessjournal.com/how-to-restore-public-trust-in-banking/#commentsWed, 25 Feb 2015 18:35:31 +0000http://iveybusinessjournal.com/?p=17458Markets rise and fall. Recessions come and go. But when it comes to the reputational challenge caused by bankers acting badly, not a lot seems to change from one year to the next.

Thanks to a huge cache of leaked secret files, the world is just now learning the extent to which HSBC’s Swiss banking arm advised wealthy clients on how to conceal millions and circumvent domestic tax authorities. Last year, following a rigorous investigation, we saw some major global financial institutions fined a total of US$4.3 billion for failing to stop the manipulation of a foreign exchange market benchmark used to value assets globally. The U.S. Department of Justice is about to weigh in on this one, with criminal charges for some of these institutions (and potentially individuals) rumoured to be in the offing.

Looking back over my 30-plus-year career, I can recall far too many cases of financial mad cow disease resulting from a range of judgment lapses, woeful product designs and a seemingly insatiable appetite for excessive leverage. Think about the savings and loan scandal from the 1970s and 1980s. Think about the conflicts of interest that existed between research departments and investment banking units in the 1990s. Think about Enron and WorldCom and the shockingly poor risk management at Long-Term Capital Management, Bear Stearns and Lehman Brothers. Think of the crimes committed by Bernard Madoff and Allen Stanford.

The combined price of these debacles alone has been estimated at over US$180 billion, and that’s not including costs incurred by the industry related to Sarbanes–Oxley and other regulatory actions.

The ultimate result of this sad state of industry standards, of course, was the 2008 global financial crisis, the impact of which has been estimated at five per cent of global GDP (over a couple of years) or $7.5 trillion. If you add up all the economic costs and fines related to shameful industry actions that have occurred in recent memory, the number approaches US$8 trillion, about the GDP of China, not to mention about US$1,100 for every man, woman and child on the planet. That may not shock everyone on Bay or Wall Streets, but to someone on Main Street, let alone in the developing world, the numbers are scary large.

It is important to note that banking is dominated by decent people who contribute significantly to society. But there is no question that the world would have been better off over these past 30 years without the cumulative impact of fraud, excessive risk taking, poor judgment and underfunded regulation. And the number of players involved in the industry’s scandals is almost moot since everyone in the financial sector is affected. Indeed, even with cases of criminal acts and poor judgment limited to a select few, the whole industry ultimately pays the price in reputational damage and the related reaction from regulatory bodies.

When will this reputational train wreck end? In my opinion, it will take tangible cultural change within our industry before anyone feels confident that the bad genie is back in the bottle. But I also believe this can be achieved through a focus on five key themes:

First, we need to realize the importance of our actions. Our responsibilities as leaders within the industry — which is the lifeblood of both the global economy and society — cannot be misunderstood. Doctors have the Hippocratic Oath. Lawyers have the Bar. Corporate boards have standards set by the Institute of Corporate Directors. Portfolio managers have the Chartered Financial Analyst designation. But bankers have nothing but their word. And that just isn’t enough anymore.

Some financial institutions have formalized expectations of values and standards. But it is time for the banking industry to consider a common values-based standard, perhaps even one with a revocable license to practice. After all, personal and corporate integrity inherent in the industry’s products and services must trump quarterly earnings releases — not just occasionally, but always.

Second, consistency and a demand for high standards across all asset classes or markets must be the bare minimum expectations. To do this, banking leaders and regulators should seriously question more industry practices to ensure that they deliver the standards of fairness, transparency, accountability and trust needed for successful markets.

LIBOR setting, high-frequency trading and questionable foreign exchange trading practices are flawed in this regard. And while they have been called out as problem areas to varying degrees by outsiders, we need people on the desks to speak up, and we need their team leaders to watch, listen and act. We cannot simply rely on regulators; we must self-regulate with purpose.

Third, we need to remember that larger forces continually shape our industry. The speed at which markets assess and adjust during business cycles is the new norm. Volatility is inevitable. Remember the 1983 Latin American debt crisis or the October 1987 equity market meltdown or the 1997 Asian financial crisis? The world economy will see more of these events and bankers must help more to contain the contagion. This is critical.

Regulators can help address the risk of contagion, but a vigilant commitment by bankers to transparency, risk management, appropriate liquidity and capitalization will minimize the impacts of volatility and ensure that consistent levels of service are maintained in all kinds of market environments.

Fourth, while we must be transparent about the industry’s challenges, we must also highlight its successes. According to research by BMO analyst Sohrab Movahedi, the global banking industry’s market capitalization increased by US$5 trillion between 1983 and 2013. During this period in North America, the average annual return of the banking industry was 15 per cent, compared to the total market return of 12.5 per cent.

Could it have been better? You bet. But let’s not forget the wealth effect multiplier through added values to retirement funds and industry employment growth. And much good has also been done when you consider the direct impact of the industry’s numerous philanthropic initiatives which have helped so many communities — a responsibility readily accepted by the industry.

Finally, everyone needs to remember the good advice of our parents and apply it to our industry: Make sure you leave it better than when you found it. This is a measure that all financial industry professionals should use in evaluating their careers.

Banking continues to be a very good industry, one in which I am very proud to work along with thousands of others. But to let the good flourish, we need to work together on the above initiatives. We need to collectively earn (or re-earn) trust in order to better serve our customers and attract the finest minds possible to work with us. If we do that, we can read more about the good that our industry does and less about the scandals that make us all look bad.

Related Articles

]]>http://iveybusinessjournal.com/how-to-restore-public-trust-in-banking/feed/0Target’s Big Mistake: Mutated DNAhttp://iveybusinessjournal.com/targets-big-mistake-mutated-dna/
http://iveybusinessjournal.com/targets-big-mistake-mutated-dna/#commentsWed, 25 Feb 2015 18:31:30 +0000http://iveybusinessjournal.com/?p=17456Target obviously doesn’t have much to brag about these days. But believe it or not, promotional material on the company’s Canadian website was still proudly boasting about the company’s history at the end of January 2015. “Browse our interactive timeline to learn how we’ve become the preferred shopping destination for our guests,” the site read, adding: “From our department store roots in the early 1900s to the opening of the first Target store in 1962 and on into the present in Canada, you’ll learn about all of our key company milestones.” The attached timeline, of course, was seriously out of date. It went into great detail about the Minneapolis-based retailer’s early days and its 2011 decision to launch an international expansion starting with Canada. But it failed to note the company’s more recent decision to retreat back across the border.

Under mounting pressure from red ink, Target announced in mid-January that its Canadian operation would seek bankruptcy protection and abandon all of the retail locations in this country that it had acquired from the Zellers discount chain less than two years ago for $1.8 billion, a move that would eliminate 17,000 jobs. How did this happen? The short answer is that the Target Canada rollout was royally botched. The longer answer is more complicated.

As soon as Target Canada opened its doors, inventory control issues cooled the excitement of many Canadian consumers familiar with the brand. Instead of great selection, customers were greeted by empty shelves. Pricing was also an issue, especially amongst experienced cross-border shoppers who didn’t find the same kind of deals that Target offers south of the border.

Executive heads rolled in Canada and the United States, where a massive security breach involving millions of customer credit cards compounded the company’s woes last year. Target issued an apology to Canadians along with a promise to do better. But the red ink didn’t stop flowing. “We were unable to find a realistic scenario that got Target Canada to profitability until at least 2021,” new CEO Brian Cornell announced in January, adding that local losses were just too great for the company to stick around. As a result, Target Canada quickly went from being seen as the exciting new retailer on the Canadian block to a business school case study on how not to enter foreign markets.

As Ivey marketing professor Kersi Antia notes, the company made some major mistakes that most business students have little trouble identifying. “The plan to open so many stores in such a short period resulted from an opportunistic takeover of Zellers, which came back to bite them in the butt because it was too aggressive,” Antia says. “And instead of taking time to really understand our market, Target acted like it wasn’t even expanding across a border. The company entered Canada as if it was the 51st state. These mistakes cost them dearly.”

The big-picture question, of course, is how did such a successful retailer make so many mistakes? And the answer to that question is that management strayed from the company’s founding principles when planning the expansion. And that led Target to enter Canada with mutated brand DNA.

The company now known as Target was founded in the early 1900s by a New Yorker named George Draper Dayton, who decided to enter retailing after several years working in banking and real estate. After carefully conducting market research, he formed the Dayton Dry Goods Company and bought land that fit his needs in Minneapolis, which his research suggested would offer the strongest growth opportunities.

Right from the start, Dayton’s operation had a reputation for solid stewardship and dependable merchandise, not to mention “fair business practices and a generous spirit of giving.” It was also known for innovation in inventory management. When merchandise shipments from New York to Minneapolis were halted by a freight-handlers strike in 1920, Dayton immediately moved to prevent empty shelves from dissatisfying customers. As the Target website notes, Dayton captured “the imagination of America by using airplanes to transport goods across country. Two Curtiss Northwest Airplane Company planes pick up 400 pounds of merchandise and make the flight to Minnesota — the longest commercial flight ever at the time. The arriving planes are paraded through the streets of Minneapolis and throngs of onlookers immediately purchase the in-demand goods. This innovative solution helps pave the way to a new method of transporting merchandise across the United States.”

Dayton is active in management until 1938, when the leadership torch passes to his son George N. Dayton, who improves the company reputation in 1946 by establishing the annual practice of giving five per cent of pre-tax profits back to the community. In 1950s, management falls into the hands of the next generation, who initially focus on slowly growing the business around Minneapolis.

In the 1960s, Dayton’s grandsons decide to seek growth by introducing a new kind of mass-market discount store, one “that caters to value-oriented shoppers seeking a higher-quality experience.”

Seen as a risky move by outsiders, the company once again takes it slow, carefully planning to differentiate itself from other retail stores “by combining many of the best department store features — fashion, quality and service — with the low prices of a discounter.” On May 9, 1961, the Minneapolis Tribune spreads word that The Dayton Company plans to form a new discount chain store that will “combine the best of the fashion world with the best of the discount world, a quality store with quality merchandise at discount prices, and a discount supermarket.” At the time, management is busy making sure the new business will be “fun, delightful and welcoming” with wide aisles, easy-to-shop displays, fast checkouts and plenty of convenient parking. The Target name and logo are also carefully selected to send a message. “As a marksman’s goal is to hit the center bulls-eye, the new store would do much the same in terms of retail goods, services, commitment to the community, price, value and overall experience,” notes the company history.

In 1962, the new venture launches with the opening of a handful of stores, starting in Roseville, Minnesota. The first store outside of Minnesota is not introduced until 1966.

Think about the history of Target. When entering the retail game, Dayton took things slow, taking time to do research and select locations that fit his business plan. His inventory management was industry-leading. The transformation of the company into a discount chain was also carefully planned and well executed. No stone was left unturned to ensure the company lived up to its billing.

Now think about the Canadian expansion, which was so poorly planned and executed that you have to wonder if the people in charge have ever even read the company’s history.

Keep in mind that Canadian consumers were pushed away because Target failed to hit the expectation mark that the retailer actually set for itself with its expect-more-pay-less brand promise. “Our mission is to make Target your preferred shopping destination in all channels by delivering outstanding value, continuous innovation and exceptional shopping experiences.” That never happened because the company seized the opportunity to buy a massive amount of empty Zellers space. That might have made sense on paper, but Target lost the ability to take things slow while compromising the ability to get locations right. As a result, management gave up control over the Target experience that had won the company so much goodwill in Canada.

Inventory issues can happen to the best businesses, especially when entering a new large country like Canada, so we can cut Target some slack on that front. But as dumb as it sounds, Target was attracted to Canada because many Canadians knew what kind of experience it offered in the States, and then it didn’t even really try to deliver the same experience. Indeed, when the company took over old Zellers locations, it inherited a high-cost store structure and outdated floor plans. This was how the company consciously decided to take on competitors (such as Walmart, Home Depot and Canadian Tire) with state-of-the-art in-store logistics thanks to sleek, ultra-efficient big-box locations that require fewer employees on the floor.

Target’s pricing problems were also preventable. Every marksman on the planet knows you have to at least try if you want to hit the bulls-eye. And if Target really wanted to be seen as the Canadian retailer with the best prices, then it should have spent the time necessary to understand what that meant to Canadians consumers, who, rightly or wrongly, hate when sticker prices are higher in Canada than in the States.

When all is said and done, Canadians were told to expect to feel special, like a guest. In Target’s own words, that was supposed to mean being offered “more of everything: more design, more selection, and more exclusives you won’t find anywhere else. And it means you’ll pay less for what you want. It’s as simple as that.” But the company checked its focus on delivering on these promises at the border, choosing instead to offer proud Canadians a mutated version of the Target experience south of the border. And that made consumers in this country feel less worthy.

Simply put, Canadians were expecting to be swept off their feet by the reliable company that George Draper Dayton founded. And we reacted badly when a basket-case subsidiary showed up instead.

Related Articles

]]>http://iveybusinessjournal.com/targets-big-mistake-mutated-dna/feed/02014 Showed Character Is as Important as Talenthttp://iveybusinessjournal.com/2014-showed-character-is-as-important-as-talent/
http://iveybusinessjournal.com/2014-showed-character-is-as-important-as-talent/#commentsTue, 06 Jan 2015 16:17:56 +0000http://iveybusinessjournal.com/?p=16873Character has often been described as the difference-maker in sports, business and life. As head of Ivey’s Ian O. Ihnatowycz Institute for Leadership, I have probably said that line hundreds of times. But it can’t be said enough because the importance of character in the workplace, especially leader character, has proved all too easy to forget in recent years.

Effective performance requires competencies and commitment. But without the support of good character, the strengths that come from having competencies and commitment can be seriously undermined. The best example of this was the 2008 financial crisis. If anything, there was a surplus of competencies and commitment among many of the world’s bankers. But shortcomings of character still caused the global financial system to nearly crash.

The good news is that the character discussion is now on — big time. And for that you can partly thank 2014, which provided a wealth of examples that clearly demonstrate the important role that character plays in the success and failure of any organization.

The Rob Ford saga was a prime example of what can happen when competencies and commitment are not supported by good leader character. Whether Toronto’s former mayor was really a champion for Joe and Jane Average is open to debate. The fact that he led a personal life that adversely impacted his professional duties is not. It is important to note that people can change their destructive behaviour. Nevertheless, the citizens of Toronto had every right to question if the lack of temperance in Ford’s personal life made him unfit for office. After all, poor judgment in personal life draws from the same character core used when exercising judgment in professional life.

As 2014 was coming to a close, the Canadian Broadcasting Corporation (CBC) learned why talent and drive should not trump character in the workplace. Indeed, instead of focusing on the organization’s core business as a public broadcaster, CBC senior management spent considerable time and energy dealing with the scandal-plagued departure of Jian Ghomeshi from the hit radio show “Q with Jian Ghomeshi.”

The CBC had willingly tied its brand to Ghomeshi when it attached his name to the program he hosted. But that move came back to haunt the organization in late October, when the broadcaster terminated its former star for conduct deemed unacceptable for an employee. At least nine women and one man alleged last year that Ghomeshi subjected them to violence, sexual assault and harassment in the workplace. As a result, the CBC spent weeks frantically attempting to distance itself from Ghomeshi by removing references to him from promotional material and taking down huge images of him from its physical locations.

Ghomeshi denies any criminal wrongdoing. Nevertheless, according to media reports, industry insiders warned people against working with him because he was not a decent boss. And even if official employee complaints were not filed, the CBC appears to have ignored, or at least failed to take seriously enough, internally voiced concerns about his behaviour at work. Simply put, the warning signs were no match for the perceived benefits that were seen to be gained from employing Ghomeshi.

Overlooking bad behaviour is easy, especially when it involves top performers. But leadership is not supposed to be easy. That’s a lesson that managers at the Baltimore Ravens learned the hard way early last year when they initially decided to support Ray Rice, the team’s star running back, when he was charged with assaulting his partner. In March, team officials described Rice’s off-the-field behaviour as a couple’s issue, not a management matter. “I think we’ll be rewarded by him maturing and never putting himself in a situation like that again,” Ravens owner Steve Bisciotti said, adding that his definition of acceptable character is someone who can learn not to repeat offences. “If we’re all one strike and you’re out, then we’re all in trouble,” he said. That’s despite a video that allegedly depicted Rice dragging his unconscious girlfriend (now his wife) off an elevator after a dispute, not to mention code-of-conduct rules introduced by the National Football League (NFL) in 2007 after a string of player arrests for various offences, including assault.

Supported by his wife, Rice avoided trial by entering an intervention program for first-time offenders. Nevertheless, the NFL came under fire when it issued Rice just a two-game suspension. And the criticism increased after a second video that allegedly showed Rice knocking out his wife was published. Claiming the new clip contradicted what they were told about the incident, the Ravens and NFL cut ties with the talented player. That should have happened sooner.

Keep in mind that there is no time-out in life. “There is a blackboard and it’ll never be erased,” former ING DIRECT USA CEO Arkadi Kuhlmann notes in my book Good Leaders Learn, adding that anyone can cross the line of acceptable behaviour, but that you can’t ask for forgiveness when you do it as a leader. The same standard should apply to pro athletes.

It is easy to create a code of conduct. But rules mean absolutely nothing if they are not taken seriously by an organization’s management and employees, including top performers. Any disconnect between what is expected and what transpires demands serious corrective action. That can be tough, which is why it requires leadership.

Ensuring good character in leaders and top performers isn’t about reputational risk. Ignoring bad behaviour is always bad business, at least in the long run, especially when the business in question involves role models. Believe it or not, the long-term benefits that come from having a healthy work environment and happy, productive employees are far greater than anything a star talent with questionable judgement can provide. As Jack Welch famously said about integrity, “If you don’t have it in your bones, you shouldn’t be allowed on the field.”

Related Articles

]]>http://iveybusinessjournal.com/2014-showed-character-is-as-important-as-talent/feed/0Learning from Boardroom Perspectives on Leader Characterhttp://iveybusinessjournal.com/learning-from-boardroom-perspectives-on-leader-character/
http://iveybusinessjournal.com/learning-from-boardroom-perspectives-on-leader-character/#commentsTue, 06 Jan 2015 18:01:07 +0000http://iveybusinessjournal.com/?p=16922In May 2013, Ivey Business Journal published “Leadership Character and Corporate Governance,” which proposed that being an effective board member requires competencies, character and commitment. In that paper, which was also published by the Institute of Corporate Directors, we further noted that qualitative research indicates that character is the one fundamental requirement that poses the biggest challenge in terms of recruiting and selecting both directors and CEOs of private, public and not-for-profit companies. Finally, we identified 11 dimensions of character (see Figure 1 below) that collectively play a critical role in director effectiveness. We raised this issue because while various dimensions of leader character are mentioned in the literature on board effectiveness, we found a distinct lack of qualitative and quantitative research on root-cause analysis of board performance.

The article was an extended essay that was short on hard data but long on ideas derived from the extensive academic and practitioner literature on character, as well as formal and informal discussions with senior leaders from around the world, who helped us in bridging theory and leadership practice. Our motivation for writing was our conviction that while leader character is critical to the success of individuals and organizations alike, it is seldom explicitly addressed or actually used by governance professionals engaged in board selection, performance review or the renewal process.

After the article’s publication, we were invited to present our ideas at nine chapter meetings of the Institute of Corporate Directors held across Canada. The objective was to facilitate a thorough discussion on leader character with people experienced in the practice of corporate governance as well as with individuals interested in becoming directors. While our initial paper was based on thorough scholarship, we wanted to put our ideas on trial by those with experience and interest in corporate governance while obtaining feedback to help sharpen our thinking. We also wanted use insights gained from these meetings to influence our teaching in business degree programs, executive education and board development courses. Following the sessions, an Internet-based survey of attendees was conducted.

The purpose of this paper is to present what we learned and offer six recommendations to improve governance in both the private and public sectors.1

LEADER CHARACTER DISCUSSIONS AND SURVEY

In total, 786 directors and would-be directors attended the nine sessions, which were each moderated by one of the authors of our original paper serving as session leader. Each meeting lasted between 75 and 90 minutes and started with a brief presentation of our ideas on leader character, including the main graphic of the paper (see Figure 1). In three of the sessions, a panel of three experienced directors discussed our presentation and the article on which it was based. The panel discussions at these meetings were followed by questions and comments from the audience before a quick summary by the session leader was delivered. In the other six sessions, no panel discussions were held. Instead, participants engaged in table-discussions that focused on several key questions. After the opinions expressed in these discussions were reported to the entire group, a meeting summary was offered by the session leader. All the discussions held as part of this research could have gone on long past the strictly imposed deadlines. Indeed, participant interest in the subject matter was very high and the topics raised during the meetings were wide-ranging. In all cases, a post-doctoral fellow, who had not been involved in the research for the original paper, took detailed notes.

Examples of questions addressed include:

Do directors and boards pay sufficient attention to issues of character when recruiting, selecting and evaluating directors? What could they do better?

Which dimensions of leader character do you think are most evident and most absent in the boardroom?

What are the consequences of “character-deficiency” in corporate governance? How could they be addressed?

How effective are boards and individual directors at assessing leadership character in others? What are some of the best ways of doing this?

Do you think leader character can be developed or do you think it is either “there or not” by the time someone is in a board capacity? How have you, as an experienced director, helped others develop leader character?

Figure 1: Dimensions of Leader Character

Within three days of each session, attendees received an Internet-based survey with four sets of questions. The first asked respondents to indicate how beneficial or detrimental they thought each of the 11 character dimensions was to individual director effectiveness. The second series of questions focused on the perceived impact of these on board effectiveness. The third asked respondents to agree or disagree with 10 statements about leader character and corporate governance that we had formulated from our prior qualitative research. Finally, the survey asked board members to reflect on their own experience and tell us what dimensions they would have liked to see more or less present in other directors who they had served with on boards in the past. We also asked respondents for information on age, gender, governance experience and educational background to see what impact, if any, those variables had on their responses.

Our survey sample was mature, experienced, educated and gender-balanced. We received 219 responses from 111 men, 103 women and five individuals who declined to state gender. The median age of respondents was between 41 and 60 and most participants were college or university graduates. Collectively, survey participants represented 443 boards, including 140 from the private sector, 115 from the public sector and 188 from the volunteer community.

OUR FINDINGS

Each of the 11 character dimensions was considered to have a high degree of positive impact on director effectiveness when survey participants were asked: “Based on your personal experience, what impact do you think that each of these character dimensions have on (a) individual director effectiveness and (b) the overall performance of the boards on which they serve?”

All dimensions averaged higher than 4.0 on a 5-point scale running from “Very detrimental” (1) to “Very beneficial” (5). Integrity (4.8), Judgment (4.8) and Accountability (4.7) scored highest, followed closely by Collaboration and Transcendence (both 4.5), Justice, Courage and Humility (all 4.4), Temperance and Drive (both 4.3) and Humanity (4.1). Interestingly, 10 per cent of our sample actually believed that Humanity was detrimental to a director’s effectiveness, twice as many as any of the other dimensions.

We looked at the “top-box” scores for each of the 11 dimensions — those who considered each dimension to be very beneficial (i.e. scored 5 on a 5-point scale). The rankings and percentages in the top-box were as follows: Integrity (92 per cent), Judgment (88 per cent), Accountability (82 per cent), Collaboration (68 per cent), Transcendence (58 per cent), Humility (57 per cent), Drive (51 per cent), Courage (50 per cent), Justice (47 per cent), Temperance (47 per cent) and Humanity (32 per cent). The “Big-3” of Integrity, Judgment and Accountability clearly stood out as being very beneficial, whereas less than half of the respondents identified Justice, Temperance and Humanity in the same way. The scores for board effectiveness largely mirrored those for individual director effectiveness.

A rather different picture emerged when we asked board members to indicate which of the 11 character dimensions they wish there had been “more or less of” on the boards that they had served on as directors in the past (see Table 1). On a scale from 1 (much less of) to 5 (much more of), it was Transcendence (appreciative; inspired; purposive; future-oriented; optimistic; and creative) that stood out in want-some-or-much-more-of responses, followed by Judgment (situationally aware; cognitively complex; analytical; critical-thinker; intuitive; insightful; pragmatic; adaptable; and decisive) and Courage (brave; determined; tenacious; resilient; and confident).

Table 1: What Directors Want More or Less of
(N = 206–217)

Finally, we asked directors to respond to a number of questions about leader character and governance using a 5-point scale running from “Strongly disagree” (1) to “Strongly agree” (5). The results are shown in Table 2.

The following survey results also help paint a clear picture of boardroom perspectives on leader character:

70 per cent of respondents believed that boards spend insufficient time addressing or assessing the character of potential nominees to their boards, notwithstanding the fact that they believe that character is very important.

79 per cent of respondents agreed that it is difficult to assess character compared with assessing competencies. But more than 60 per cent of respondents believed good interviewing and deep reference checking can be successfully used to assess character.

64 per cent of respondents believed that the educational system does a poor job of developing character and an overwhelming 92 per cent believed business schools need to better address character-related issues.

66 per cent of respondents believed character can change after someone becomes an adult.

82 per cent of respondents believed early workplace experiences can have a substantial impact on character formulation.

92 per cent of respondents believed that a critical role of the board is to evaluate the character of their CEOs and C-suite executives.

Finally, 94 per cent of respondents agreed that the character of the CEO has a tremendous impact on the effectiveness of the board. We ran statistical tests to explore whether gender and years of experience on boards affected the results; however, no significant differences in responses emerged.

CONCLUSION AND RECOMMENDATIONS

Following the Global Financial Crisis, we initiated an ambitious research and outreach program to address the challenges involved in bringing leader character into workplace conversations because we believe it really matters. Our work over the past five years shows that leaders in the public, private and not-for-profit sectors readily agree. But they also told us that they seldom refer to character in conversations or use it in recruiting, promoting and developing leaders.

When it comes to corporate governance, our data shows that directors believe it is possible to assess the leader character of potential and existing directors through deep reference checking, expert interviewing and candid reviews. And yet, boards don’t spend enough time and effort doing it. Why? There are at least two main reasons.

First, there has been a great deal of ambiguity around the construct of leader character. Individuals may perceive character to be a highly subjective construct and do not have access to a contemporary, practice-focused vocabulary with which to address character in the workplace. We have addressed this issue by developing the leader character framework discussed above and by developing both a self-assessment and 360-degree feedback instrument of leader character. Practitioners were involved in this process to ensure we got the language right.

Second, developing the kind of behaviourally based interviewing skills that can expose character strengths and deficiencies requires training, time and dedicated effort. It is not a trivial exercise. After all, unless done very skillfully, it can upset potential board candidates who do not recognize the process as something that all responsible organizations should do. Unfortunately, our research indicates that very few board search committees have members formally trained in effective interviewing techniques. As a result, boards frequently search for “rare” candidates based on status in the business or governance community, experience, gender, lack of conflicts and other criteria. And when this is done, there is often a reluctance to conduct thorough and systematic interviewing due to concerns over having the process put off any nominee identified as an ideal choice for new board membership.

Boards and their selection committee are also often confronted by a “reputation smokescreen.” One author of this paper came across a good example of this issue while he conducted a three-day interviewing workshop. The CEO of the company sponsoring the program attended the workshop. On the last night, the CEO in question hired a new senior vice-president almost immediately after meeting what appeared to be a good candidate for the job in the hotel bar. “He’s a known quantity in the industry — no risk there,” he responded when asked about the logic behind his decision. The newly hired executive lasted a year before being let go over a lack of “alignment of values.” In effect, the age-old “halo” effect obscured reality in this case and led the CEO to make a costly bad call.

Simply put, too many leaders believe that it’s just fine to base hiring decisions upon reputations that are not verified via probing interviews and deep reference checks. What they fail to realize is that the more experienced a potential director is, the more she or he becomes a so-called “known quantity,” and therefore the less likely she or he is to be the subject of probing interviews and deep reference checking.

All reputations should be checked. As noted by Bell Canada CEO George Cope, it is important to be careful about what the outside world tells you about potential hires and business partners, especially what the world of social media tells you. “I’ve developed a lot of new business relationships,” Cope notes in Good Leaders Learn, highlighting the joint $1.32 billion acquisition of Maple Leaf Sports & Entertainment that he negotiated in 2012 with the former head of Bell’s number-one competitor. Prior to the move, few industry watchers expected a strategic partnership between these two aggressive competitors. But Cope didn’t listen to the outside noise. “It was very important for me to determine whether the CEO was someone we could work with. We met, got to know each other as people, and realized that while we and our companies must compete fiercely in the market every day, we could indeed work together on this project. You may have impressions of people from the media, and other information sources, but I’ve learned not to pre-judge people. Go and talk to them — get to know them directly.”2

The bottom line is that listening to the outside world without doing your own homework often leads to bad recommendations for directorship roles, especially when they are made by sitting board members. Indeed, since such recommendations can carry overwhelming weight, self-censorship (e.g. for political or self-preservation reasons) often leads to an abbreviated form of candidate evaluation.

Based on our research, it appears that too many companies simply “assume” that character will be addressed in the hiring process. To make matters worse, an “absence of negatives” is often assumed to indicate positive character dimensions. But not hearing anything “bad” about an individual is clearly not enough to conclude that they have the valued leader character dimensions — such as courage, transcendent thinking or excellent judgment — that support individual and organizational success.

Our research also revealed an overemphasis on collaboration amongst board members, often at the cost of courage, accountability and the quality of decisions. Individuals refrain from disagreeing with other board members even when they should. A board member in one session stated that: “I think the one dimension that boards experience in excess is collaboration. Boards are natural breeding grounds for groupthink — the persistent belief that we need to come to consensus; boards are expected to come together. I think collaboration is an admirable goal, but in its excess is detrimental to the board and the decisions it produces.”

Board members in our research also recognized the place of judgment as being pivotal to effective boards and that, without judgment, decisions can be potentially disastrous. One board member articulated that, “It’s amazing how good people can do bad things. What is it in the context that people miss? This comes down to the central role that judgment plays — you can have all the (other) 10 dimensions of character but if you exercise poor judgment, you can still end up with disastrous situations.”

The following recommendations are designed to address the issues raised in this paper and help improve the director search, evaluation, performance review and renewal processes:

Be explicit about search criteria and include the character dimensions along with competencies; make sure that if you are using a search consultant they know and understand the character dimensions that are important to the board.

Ensure that whoever does the interviewing is, in fact, a good interviewer and, if they’re not, insist that they take some training. If members of the governance committee from whom a selection committee is usually constituted are unqualified to be the interviewers — and many will disqualify themselves — substitute with other directors or consultants.

When multiple interviews are done sequentially, ensure that each interviewer has a set of questions so that the sessions are comprehensive but not repetitive. Furthermore, schedule a session of all involved in the process to share their observations. As the chair of the selection committee, check to ensure that all the criteria have actually been covered in the aggregate and that no key criteria have been ignored.

Task the search consultant, if one is used, to develop a comprehensive list of referees who actually know the potential nominee rather than just his or her reputation and be thorough in requiring the consultant to fully share the content of the references, checking that the consultant has actually probed for character strengths and deficiencies.

When asking a referee whether they “know” someone, care must be taken to understand the context of that knowledge. Has the referee actually observed a potential director in their role as director, as a competitor, as an executive, as a customer or supplier, as someone who has worked for them and so forth? Or, are they relying on reputation?

If a candidate resists or resents discussion about character, then you should resist the candidate. You should be looking for candidates who themselves consider discussion about character to be important and, if asked the right questions in the right way, will feel good about the organization they are being asked to consider serving.

We urge all boards to address character in their review processes. After all, if, as our research suggests, directors view the character dimensions we describe in this paper as important, then surely any review process that does not address character is deficient. We recognize that many boards do not have formal processes for character assessment and rely instead on informal discussions. Nevertheless, we urge these boards to think about the importance of character dimensions and feed them into their hiring process and informal performance reviews. We also see some value in directors doing a personal, character-based self-evaluation that can be used in discussions with others or simply for personal reflection.3

While boards quite properly seek diversity of experience, perspective, gender, ethnicity or other criteria, this should not extend to character. It is not sufficient to have some directors with accountability and others who lack it; or some who are courageous while others are timid; or some who lack good judgment while others have it; and so on. Good governance requires these character dimensions in each director (e.g. the dimensions work separately and together to influence decision making and action; for example, individuals who have courage in excess may act recklessly unless they have access to the character dimensions of temperance and judgment) and hence in the board as a whole.

When someone is appointed as a director, they have to work immediately with other directors — who may be complete strangers — on important matters requiring trust, discretion, independent thinking and excellent judgment. If there are doubts about character, the board will not function well. Once appointed, it is very difficult to terminate a director and the longer that inappropriate or dysfunctional character-driven behaviours are accepted and tolerated, the harder they are to remediate. A thorough, complete and expert assessment of character will not guarantee board performance, but will go a long way towards it.

—1 The authors acknowledge the great contribution of the Institute of Corporate Directors and its chapter chairs, and especially Ms. Vicki Jordan and Ms. Agathe Manikowski, in facilitating our research.2 G. Seijts, Good Leaders Learn: Lessons from Lifetimes of Leadership, Routledge, New York, New York, 2014.3 We have developed a leader character diagnostic — the Leader Character Insight Assessment (LCIA) — in both self-administered and 360-degree formats. The LCIA is a resource to help individuals unpack and discuss the dimensions and elements of leader character. Individuals who complete the LCIA receive a report that provides individual feedback on the character dimensions of leader character and their associated elements. The report also provides suggestions on how to strengthen character dimensions. We have worked with several organizations who found the process insightful.

Related Articles

]]>http://iveybusinessjournal.com/learning-from-boardroom-perspectives-on-leader-character/feed/0Don’t Confuse Sustainability with CSRhttp://iveybusinessjournal.com/dont-confuse-sustainability-with-csr/
http://iveybusinessjournal.com/dont-confuse-sustainability-with-csr/#commentsTue, 06 Jan 2015 11:27:51 +0000http://iveybusinessjournal.com/?p=16878No challenge derails managers from the goal of sustainability more than trying to understand what it means for an organization to really be sustainable. Some people think sustainability is all about environmental issues. Others see it in terms of the bottom line. And then, of course, there are people who use the term synonymously with corporate social responsibility and shared value.

Business sustainability is none of these things. Rather, it is about time.

In 1987, the World Commission on Environment and Development published “Our Common Future,” which defined sustainable development as development that “meets the needs of the present without compromising the ability of future generations to meet their own needs.” This ethic is almost indisputable. After all, most people expect to live as well as their parents and they want their children to be afforded similar opportunities.

Expressed in this way, sustainability balances resource usage and supplies over time. In other words, sustainability assures intergenerational equity. When the resources we actually use match the earth’s capacity to regenerate adequate future supply, then our systems remain balanced indefinitely. However, if resources used exceed this capacity, then current demand is being met by borrowing from the future, which will eventually lead to an inability to meet society’s needs.

A good example of sustainability is the investment approach taken by the Norwegian sovereign wealth fund, which puts aside royalties from natural resources for future generations and deploys the interest to meet current needs. Unfortunately, most countries, including Canada, spend royalties as they accrue, exploiting the wealth in the ground, leaving little for future generations.

The corporate social responsibility (CSR) camp focuses on balancing current stakeholder interests. A socially responsible oil company would build local schools and hospitals to compensate communities for their resource extraction. But such measures do not always acknowledge the long-term impact on the communities. Keep in mind that schools and hospitals require staff and ongoing servicing. So CSR measures can actually impose long-term liabilities on affected communities, making well-intentioned actions unsustainable.

Magna International, the global auto parts empire founded by Canadian billionaire Frank Stronach, ran into trouble over this issue after building a new town (from scratch) in a sugarcane field near Simmesport in Central Louisiana for victims of hurricanes Katrina and Rita. Known as Magnaville, the town in question was supposed to become a self-sustaining organic farming community, but that required winning local support for the project. To do this, Magna offered financial incentives and built new modern sporting facilities for the local community. But as Canadian Business magazine noted, conflict over sustainability issues derailed Stronach’s vision. The City of Simmesport objected to the money it would have to spend to maintain a proposed massive community centre that would also serve as a state-of-the-art emergency evacuation facility.

The common approach to corporate social responsibility is grounded in ethics, morality and norms. And there is no question that many CSR initiatives are good at balancing competing demands made by shareholders and other stakeholders. To do this, however, many supposedly responsible firms borrow resources and capital from the future, which can magnify the imbalance in the distribution of resources between the short and long term.
It is time for organizational leaders to stop confusing responsibility with sustainability, which hinders businesses from thinking deeply enough about the inequities created by their actions over time. Simply put, some activities are either responsible or they are sustainable, not both.

Charitable donations that relieve social problems are responsible, but they are not sustainable if they do not resolve underlying issues. On the other hand, 3D printing isn’t typically included in CSR reports. And yet it is both sustainable and responsible. Relative to large-scale industrial production, 3D printing uses fewer materials, generates less waste, adjusts quickly to new designs and caters to local needs. In essence, this technology is supported by a positive moral footing without borrowing from our future resource supply.

The only moral imperative that grounds sustainability is the need to balance the short- and long-term supply and demand of resources. Securing short-term success should never risk long-term survival. Business sustainability is the ability of firms to respond to their short-term needs without compromising the ability to meet future needs. By focusing on the “sustaining” part of sustainability, businesses can build long-term relationships, innovate enduring designs and invest in long-lasting infrastructure. Not only will this help firms survive over the long term, it will help them thrive.

Related Articles

]]>http://iveybusinessjournal.com/dont-confuse-sustainability-with-csr/feed/0Cracking the Glass Ceilinghttp://iveybusinessjournal.com/cracking-the-glass-ceiling/
http://iveybusinessjournal.com/cracking-the-glass-ceiling/#commentsTue, 06 Jan 2015 14:54:11 +0000http://iveybusinessjournal.com/?p=16881Despite the gains made by women in the job market in recent decades, the access of women to the upper levels of the business hierarchy remains limited. A vast literature seeks to explain the barrier to female advancement widely known as the “glass ceiling,” which is regarded as “an egregious denial of social justice,” at least by the U.S. Department of Labor. But the two primary strands of this literature — one using experimental methods and the other using data gleaned from sports events — offer very different conclusions. In this essay, we examine what these studies have added to our understanding of the glass ceiling and point out the limits of the methods that they employ.

ECONOMIC CONTESTS

When it comes to athletes, it is generally accepted that slight variations in performances can vastly alter rewards. At the Masters Golf Tournament in 2013, for example, Adam Scott and Ángel Cabrera ended the regulation 72 holes tied for first place. After taking two extra holes to finally best Cabrera, Scott won US$1.44 million, while Cabrera received only US$864,000 for his second-place efforts, a difference of over half a million dollars. Overall, the performance of these two golfers was barely distinguishable, but the difference in their respective rewards was massive.

Winning contests also increases pay in much of the business world. Standard economic theory posits that linking worker pay to performance provides employees with an incentive to put out the optimal amount of effort. The most direct way of doing this is by offering a fixed payment per unit of output. A common application of the piece-rate payment system is a commission. A car salesperson who sells one more vehicle than a coworker, for example, receives slightly higher pay, while one who sells twice as many cars than other members of the sales team receives much higher pay. Unfortunately, firms cannot always determine employee contributions to output as clearly as an auto dealership. Even when management can observe productivity, monitoring worker performance can be costly. Firms also cannot always account for all the factors that influence productivity. As a result, managers often do not worry about absolute employee performance. Instead, they rate a worker’s output by comparing it to the productivity of his or her peers.

Simply put, determining the top-performing employee in a relative sense is easier than figuring out exactly how much every worker contributes to the firm. The workplace thus becomes a contest between workers — a contest in which the winner receives a relatively high reward and the loser receives a relatively low reward.

To generate the desired level of effort by the workplace contestants, a firm can adjust the difference in pay between the winner and loser in its rank-order tournament (ROT). Larger differentials increase the worker incentive to deliver optimal effort on the job. ROTs have been used to explain a number of observations about firms. For example, large firms tend to offer larger raises associated with promotion. In part, this is because the larger number of people competing for the promotion makes it more difficult for firms to identify the most productive worker. Since a weak link between effort and reward reduces the incentive that any given reward provides, some firms must offer a larger reward to maintain work intensity.

THE IMPLICATION OF EXPERIMENTAL STUDIES

While the theory behind ROTs is clear, measuring how people respond to the incentives presented by rank-order tournaments is not easy. Economists and other social scientists have attempted to increase our knowledge of how incentives influence performance via experiments. They have conducted experiments under “laboratory conditions” outside the messiness of the workplace, using randomly selected groups asked to perform specific tasks in carefully controlled settings. By modifying the setting for some individuals, these studies can compare the behaviour of experimental and control groups.

Recent experimental research (of which we present a sampling) has shown that women and men respond differently to tournament settings. In particular, the studies find that men respond positively to tournament environments while the performance of women has a tendency to falter. Gneezy, Niederle and Rustichini (2003), in a study conducted at Israel’s Technion engineering university, asked students to solve mazes. No difference in the performance of men and women was found when a fixed reward per puzzle solved was offered. But when the reward system was changed to a winner-take-all setting that only rewarded the person solving the most puzzles, the performance of men improved while the output of women stagnated. The male–female differences were largest in mixed-gender groups. A related study, by Gneezy and Rustichini (2004), showed that theses gender differences are robust to changes in both the sample and the nature of the activity. Israeli fourth graders were timed when asked to run both individual sprints and head-to-head competitions. Boys in this study ran faster in competitive settings, while the girls slowed down. The results were robust to the gender make-up of the competitive race and to the relative abilities of the runners.

Using a sample of British college students, Gill and Prowse (2010) shed more light on the competitive nature of men and women by adding a random element of luck while conducting contest experiments with multiple rounds. This study found that women reduced their effort to win future contests after experiencing a failure caused by misfortune. Men in this study reduced effort only after failing to win large prizes, while the female response to bad luck was independent of prize value. The difference in the response to misfortune was found to account for about half of the gender performance gap observed in the study.

With such a large difference in the responses of men and women to competitive settings, one might conclude that women would seek to avoid them. Using a sample of English high school students, Booth and Nolen (2012) showed just that. Given the choice between a piece-rate reward system and a tournament system, girls were more likely than boys to choose the piece-rate setting. Interestingly, girls who attended single-sex high schools were more likely to choose the riskier format.

There are three key findings from the experimental literature reviewed above:

Women respond less positively than men to the incentives associated with competitive settings

Women are more easily discouraged than men by random adversities

Women are more likely than men to avoid competitive settings

As professional advancement becomes more reliant on contests, these conclusions indicate that women will continue to be at an increasing disadvantage as they move up the corporate ladder since the conclusions suggest that ending overt discrimination would not break the glass ceiling. But while the above experiments add greatly to our understanding of the preferences of men and women, they are limited by the two features that give them credibility.

In abstracting from the real world, experiments create a different environment from what people actually face in the workplace. Boys or men might prefer to enter a contest when all they risk is a few dollars, but they might reach a different conclusion when retirement savings or a child’s education fund is at stake. Furthermore, to generalize from experiments, one must be sure that the subjects of the experiment were randomly selected. If not, there is no reason to presume that a similar experiment conducted elsewhere would yield similar results. This limits the applicability of the experiments noted above because workers are not randomly chosen. Women and men who compete for executive promotions differ from women and men who are content to remain in lower-level positions.

Simply put, people choose specific occupations, making the random selection of participants in the experiments an artificial world that does not necessarily reflect reality. And since workers tend to sort themselves into settings for which they are particularly well suited, experimental findings must be tested against “real-world” data before drawing hard lessons from them. This, of course, presents its own set of problems. After all, ROTs supposedly arise precisely because employers find it so hard to measure workers’ performance.

THE IMPLICATION OF SPORTS RESEARCH

There is no question that sports data can provide economists with far more detailed information on compensation and individual performance than most other settings. Keep in mind that it is very hard to determine how much a mid-level accountant contributes to the output of a major accounting firm, even if pay records are available. But performance and pay measures abound for every major-league shortstop and shooting guard. For this reason, researchers turn to sports data to test hypotheses about how the labour market operates.

ROTs have become a particularly popular subject for study because sports such as tennis and golf explicitly follow tournament structures and reward participants on their rank finish rather than on their absolute level of performance. The literature began with Ehrenberg and Bognanno (1990a) and Ehrenberg and Bognanno (1990b), two seminal studies that examined how golfers respond to incentives on the PGA Tour. They found that PGA players do better in the final round of a tournament when they are closer to the lead and improving one’s ranking yields a greater reward.

Since the publication of these studies, ROT theory has been applied to a wide variety of sports, including NASCAR (von Allmen, 2001). Only recently, however, have economists turned their attention to whether male and female athletes respond differently to tournament incentives. And the findings of this literature generally — but not uniformly — contradict experimental results.

Studies involving professional tennis, for example, show that favourites in elimination tournaments win more frequently when the stakes are higher, regardless of whether they are men or women. Preliminary evidence also suggests that women on the Women’s Tennis Association tennis tour do not respond more negatively to setbacks than men, as they are no more likely to lose in straight sets than men are.

In a highly creative study, Paserman (2010) determined the crucial points in a series of tennis matches and used them to test whether women and men respond differently to pressure. Both women and men were found to play more conservatively in these situations. Women made more unforced errors, but the greater number of errors made did not appear to affect ultimate outcomes. Studies of golf tours, meanwhile, have found that women respond to prize structures and incentives in roughly the same way as men. In fact, stroke totals for final rounds of golf tournaments suggest that women respond more positively to pressure than men when competing in contests.

In studies of non-traditional sports, female skiers have been found to respond to the differences in rewards as they move up the leaderboard. Unfortunately, no comparable study has been done of men. In figure skating, women appear more responsive than men to incentives, as their scores improve more when close to the lead and when competing in high-profile events.

There is also evidence that women resemble men in terms of effort as well as performance. Studies of long-distance runners, for example, indicate that women train as hard as men.

Track-related studies have also found indirect evidence that suggests that top female sprinters tend to sort themselves among tournaments to avoid competing directly with each other. But when it comes to sports data, this is the only finding that really supports conclusions drawn from experimental studies.

While the findings of experimental studies may appear unduly gloomy, the findings based on sports data might be overly optimistic, since athletes are much more narrowly sorted than workers in the labour force. Virtually all sporting events are segregated by sex, with women competing only against other women. Furthermore, these women are in a narrow age band, ranging from the mid-teens to mid-thirties. As a result, they face less pressure from marriage and children than women in the wider workforce. And since studies using sports data are silent on the issue of how older women respond to incentives, the research might overstate positive responses to incentives.

CONCLUSION

The research cited in this essay points in opposite directions. According to the experimental literature, the existence of the glass ceiling stems from female preferences. That suggests that anti-discrimination public policy will have limited impact on women’s progress up the corporate ladder unless these preferences change, which would require women to somehow view themselves and their families, not to mention the world around them, differently. Indeed, if the conclusions of this body of literature are valid, nothing short of a complete overhaul of corporate reward systems will shatter the glass ceiling.

The literature based on sports data tells a different story. Our ability to draw workplace conclusions from studies involving female athletes obviously depends on how closely we can link women who choose these two spheres. Nevertheless, the sports-related literature finds that women and men behave similarly, which suggests that the glass ceiling is an artificial barrier that can be broken. And so, if women can compete with their male colleagues as well as they do with female competitors in sporting events, and if they can maintain this effort in the face of family demands until they retire, then we will see many more female executives once artificial barriers in the workplace are lifted.

Related Articles

]]>http://iveybusinessjournal.com/cracking-the-glass-ceiling/feed/0Welcome to the New IBJhttp://iveybusinessjournal.com/welcome-to-the-new-ibj/
http://iveybusinessjournal.com/welcome-to-the-new-ibj/#commentsTue, 06 Jan 2015 03:15:22 +0000http://iveybusinessjournal.com/?p=16895When I signed on as editor of Ivey Business Journal, I promised our international audience improved intellectual return on time invested reading our publication. The new IBJ you see today was designed to deliver on that promise.

IBJ was launched as The Quarterly Review of Commerce in 1933, shortly after Western University’s Department of Business Administration introduced graduate work. The objective was to “serve as a source of excellent reading material for the alert business executive.” Many things have changed over the years. Both this publication and the business school that publishes it have changed their names more than once. But our mandate remains the same.

The Ivey Business School exists to “develop business leaders who think globally, act strategically and contribute to the societies in which they operate.” IBJ has always contributed to this mission by publishing content aimed at improving the practice of management. And now thanks to our redesign, which includes a change in format, we are an even better and more interactive resource for our target audience of C-suite executives, corporate directors, managers and academics.

The new IBJ will not publish formal issues. Instead, it will offer a steady stream of feature articles (on topics ranging from the critical role that character plays in corporate governance to an examination of executive blind spots that hinder innovation), as well as exclusive executive interviews and IBJ Insights, concise commentaries offering unique analysis of current events and market trends. Noteworthy articles from our archives will also be regularly highlighted.

If you are interested in contributing content, please see our new submission guidelines. In the meantime, thank you for reading.

]]>http://iveybusinessjournal.com/welcome-to-the-new-ibj/feed/0Engaging the Moment Makes Better Leadershttp://iveybusinessjournal.com/engaging-the-moment-makes-better-leaders/
http://iveybusinessjournal.com/engaging-the-moment-makes-better-leaders/#commentsMon, 05 Jan 2015 22:01:26 +0000http://iveybusinessjournal.com/?p=16886When looking back for valuable lessons offered by the year 2014, a good place to start is the performance of Canadian tennis star Eugenie Bouchard at Wimbledon. After all, while Bouchard didn’t win her final match, she still served up lessons worth noting by everyone, especially leaders.

Leaders can learn a lot from athletes like Bouchard, who had long dreamed of stepping onto centre court at the “cathedral of tennis” for her first Grand Slam. Before the final, she said: “I just want to be able to handle the moment.” When it comes to Bouchard’s success as a tennis player, the ability to engage the moment is a skill every bit as important as her serve. And the same things that challenge an athlete’s ability to engage the moment can subvert the focus of leaders.

As Austrian neurologist and psychiatrist Victor Frankl noted, the space between stimulus and response creates an opportunity to engage the moment in a way that can be transformative. But doing this is extremely difficult because attention on the task at hand can be drawn away by past experiences, not to mention expectations for the future.

Like athletes, leaders need to reflect on the past and plan for the future, but both need to bring the best of themselves when facing the present. The ability to do this is developed over time and anchored in competence, character and commitment, which are only developed in everyday moments.

Competencies are what a person can do and commitment is the effort someone will put into doing it, while character influences the choices people make as they attempt to achieve goals (including whether they will acquire the requisite competencies and make the required commitment). All are necessary and work together to deliver short- and long-term performance, which is realized through the present and the string of present moments. Indeed, for great athletes, the ability to engage the moment isn’t reserved for grand competitive occasions. It is a habit. Being fully present during everyday moments provides the foundation and focus for tackling the big moments.
Immersing yourself in the moment requires heightened awareness. It is also essential to quiet what can be a judgmental and dysfunctional mind. Stressful moments activate the fight/flight response, releasing adrenaline and distracting thoughts. To maintain focus, top athletes rely on breathing techniques to maintain control. Leaders can do the same thing to engage present moments, particularly stressful ones, in productive ways.

While having expectations to achieve, great athletes and leaders alike understand that fear of failure is a distraction that can cripple performance, which is why they learn to focus on process rather than outcome. They teach themselves to be comfortable with the unknown. Instead of fearing the feeling of not knowing, some even learn to enjoy it.

A common saying in the military is that soldiers will “rise to the lowest level of training they have achieved.” The same is true of athletes and leaders. It is easy to get rattled under pressure, but trusting one’s preparation helps to ensure commitment to the moment. Athletes rely on well-established routines that they can trust under pressure. The equivalent for leaders is developing the character, competencies and commitment that provide both the confidence to trust in them, and the depth to ensure that they do not crack under pressure.

It was not a fairy-tale ending for Bouchard at Wimbledon. She was dominated by Petra Kvitová in her final match, which has been called the most lopsided women’s championship in 22 years. Bouchard engaged the moment and executed on all of the things that had gotten her to this point in her spectacular career. But character and commitment are not enough when facing someone with the same or superior competencies. As commentators noted, Bouchard was “outplayed, outclassed by a bigger, stronger opponent.” Yet, there was nothing but praise for Bouchard, who was described as “poised beyond her years.” All expectations are that her character and commitment will enable her to develop the full set of competencies to be a Wimbledon champion.

“It is a tough road to become as good as I want to be,” Bouchard told reporters after the match. “It was a big moment walking out on the centre court for the final…. I hope I can walk out to many more.” When asked if losing the final was a gut-wrenching experience, she simply replied, “If I try my best, it is all I can do.”

Bouchard has learned to be gentle with herself while driving for excellence, which is why she still resists the temptation to be distracted from the task at hand. We can all learn from her ability to live up to the Kipling quote portrayed prominently at Wimbledon: “If you can meet with triumph and disaster and treat those two impostors just the same.”

Related Articles

]]>http://iveybusinessjournal.com/engaging-the-moment-makes-better-leaders/feed/0Nanotech’s Big Issuehttp://iveybusinessjournal.com/nanotechs-big-issue/
http://iveybusinessjournal.com/nanotechs-big-issue/#commentsWed, 24 Dec 2014 15:21:39 +0000http://iveybusinessjournal.com/?p=16862The US$20-billion-plus nanotechnology sector is clearly a disruptive force, one that is expanding rapidly. In addition to spawning innovation across a broad spectrum of applications and manufacturing processes, deploying materials from the atomic and molecular scale allows industry to add unique properties and immense added value to commercial and consumer products. As things stand, few people realize just how frequent nanotechnology is used to enhance consumer products, ranging from sunscreens, food additives, cosmetics and pharmaceuticals to tires, sporting equipment, inks and paints.

Unfortunately, awareness of how to best manage the risks associated with nanotechnology is not expanding as rapidly as the industry. The big issue is that nanoscale particles may cause toxicity in a different manner than traditional particulates. As a result, there is a potential risk of creating a disease legacy similar to the one caused by asbestos use. There are thousands of types of nanoparticles with different properties, so the term “nanoparticle” itself should not be equated with asbestos. However, there are some general parallels between the broad introduction of nanomaterials and the early promise of asbestos when first applied industrially.

Like the nanomaterials deployed today, asbestos was once considered to be a “wonder product” with flexible and adaptable characteristics and incredible value-adding properties. Asbestos was widely used in construction and household goods, in addition to being a central material used to manufacture ships, trains, electric turbines, steam boilers and fire-retardant coatings. The first medically documented concerns over asbestos didn’t appear until 1924 (when they were published by the British Medical Journal), but reports of widespread lung disease related to working conditions in asbestos mills date back to the late 1800s. As early as 1908, insurance companies in the United States and Canada started increasing premiums and decreasing coverage for industry employees. According to a RAND study, more than 730,000 people filed asbestos-related claims in the United States between the early 1970s and 2002, resulting in total costs to the industry of about US$70 billion. The study projected that post-1965 cancer deaths related to asbestos exposure alone would surpass 400,000 by 2029.

While many nanomaterials are benign, there have been indications that certain nanoparticles may lead to toxicity. According to a recent Harvard-based report, a female lab worker developed health issues while handling nano-sized particles received from a downstream third party for application in a manufacturing process. The worker in question was reportedly unaware of the nanoscale format of the materials being used and did not use proper precautions as a result. At the very least, this case highlights the need for more industry awareness.

To reduce the risk of creating a health legacy similar to that associated with asbestos, we must ensure the safe usage of nanomaterials throughout the supply chain. To do this, all industry stakeholders (ranging from risk managers to regulators and investors) must understand that the novel nature of nanoscale properties has fundamentally shifted the manner in which we must approach toxicity assessment. Indeed, given the dynamic formats of nanoparticles at various points in the lifecycles of these advanced materials, proper industry risk assessment requires a specific expertise that is currently limited in supply.

Simply put, we need more people trained to evaluate and manage health and safety matters related to nanomaterials. We also need better education and training on related best practices along with better industry regulation and more readily available documentation on the risks associated with such sophisticated materials.

The nanotechnology sector offers immense promise across a range of industries. Nevertheless, it is time for all stakeholders to take more proactive measures to avoid adverse human, environmental and economic consequences. As things stand, companies connected with nano-based materials face a real challenge managing the health, safety and potential toxicity of these materials, not to mention the emerging public perception of related risks.